If you are new to the world of mortgage broking, you might stumble across some finance buzzwords that make you scratch your head 🤔. Don’t worry – we’ve all been there!
Whether you are using a broker for the first time or looking to learn a little more about how financing property or investment works, there are some key definitions that will help you along your finance journey.
We thought we would compile a handy list of 35 buzzwords that we throw around the office of a week, and that you will likely stumble across on your finance journey.
Australian Prudential Regulation Authority (APRA): The Australian Prudential Regulation Authority (APRA) an independent statutory authority that supervises institutions across banking, insurance and superannuation and promotes financial system stability in Australia.
Big 4 Banks: The 'big four banks' is a colloquial term for the four dominating financial institutions in Australia; including ANZ, Commonwealth Bank, NAB and Westpac.
Capital: Capital involves anything of value or benefit to its owner, most commonly financial assets e.g., cash and other liquid assets.
Capital Gain: Capital gain is the profit earned from the sale of your property or investment. There is a tax associated with this profit called 'Capital Gains Tax' (CGT).
Collateral: Collateral is something pledged as security for repayment of a loan, to be forfeited in the event of a default on the loan. Examples of collateral include real estate, automobiles, valuables and collectibles, machinery and equipment and other investments.
Comparison Rate: A comparison rate includes the interest rate as well as certain fees and charges to identify the true cost of a loan. It is designed to help you gain a greater understanding of the overall cost of a loan, rather than only using the interest rate. This allows you to compare rates with other lenders to seek out the best option for your financial goals.
Debt Consolidation: Debt consolidation is the process of combining all of your existing debts together into one loan. This eliminates the potential for different timelines and interest rates and provides a more structured approach to paying off your debts.
Deposit: A deposit is a sum payable as a first instalment on the purchase of something or as a pledge for a contract, the balance being payable later.
Equity: Equity is equivalent to the current market value of your home minus the amount still owing on your home loan. Your home equity can be used instead of a cash deposit to buy an investment property, for example. Refinancing is a popular way to access your home equity.
First Homeowner’s Grant (FHOG): The First Home Owner’s Grant (FHOG) is eligible to first home owner’s looking to build or buy their first home. There is various eligibility criteria associated with the grant, and this differs between states in Australia.
Fixed Rate Loan: A fixed rate loan, as the name implies, is a loan with a fixed rate and thus, fixed loan repayments. A fixed rate loan allows for more precise budgeting as repayments do not rise if the official interest rates rise. By this metric, repayments also do not fall if interest rates fall. Hence, this option is less flexible in comparison to a variable rate loan. This type of loan also allows only limited additional payments and penalises early payout of the loan.
Funds to Complete: Funds to complete are the total funds required to complete a purchase transaction, including the property purchase funds and all other associated fees and charges.
Guarantor: A guarantor is a person who guarantees a loan for a family member or friend and is responsible for paying back the entire loan if the borrower can’t.
Interest Only Loan: An interest only loan involves repayments that only cover interest on the amount borrowed for a set period. This means that during this time, nothing is paid off the amount borrowed (the principal). This loan option can result in lower repayments over this period of time, however there are other pros and cons that must be considered.
Lender: A lender is a financial institution that loans money to a borrower for a set period to be repaid with interest; e.g. a bank.
Line of Credit (LOC): A line of credit (LOC) is a pre-set borrowing limit that a borrower can draw on at any time.
Lender’s Mortgage Insurance (LMI): Lender’s Mortgage Insurance (LMI) is a one-off cost charged by the lender to borrower’s that have a deposit of less than 20% of the home’s purchase price. LMI allows borrowers to enter the property market sooner with a smaller deposit, and is added to the total amount of the home loan.
Loan to Value Ratio (LVR): Loan to Value Ratio (LVR) is the percentage of the amount you need to borrow to buy a particular property, using the lender’s valuation of the property. LVR is equal to the amount you need to borrow, divided by the lender’s valuation of the property and is expressed as a percentage.
Negative Gearing: Negative gearing involves the costs associated with owning the property exceeding the rental income being produced by the property.
Offset Account: An offset account is a transaction account linked to a home or investment loan. The money is this transaction account is used to offset your loan balance and thus, can decrease the amount of interest paid on the loan.
Positive Gearing: Positive gearing involves the rental income of a property exceeding the costs of owning the property.
Pre-approval: A lender provides a pre-approval to a borrower when the lender has agreed to lend an amount of money towards the purchase of a home but hasn’t proceeded to a full or final approval. A pre-approval allows you to navigate the housing market with a realistic borrowing capacity for your situation.
Principal: The principal is the sum of money borrowed from a lender, on which interest is paid.
Principal and Interest Loan: A principal and interest loan is a home loan whereby payments on both the principal and interest of the loan are paid at the same time.
Reserve Bank of Australia (RBA): The Reserve Bank of Australia (RBA) is Australia's central bank and derives its functions and powers from the Reserve Bank Act 1959. Its duty is to contribute to the stability of the currency, full employment, and the economic prosperity and welfare of the Australian people. It does this by conducting monetary policy to meet an agreed medium-term inflation target, working to maintain a strong financial system and efficient payments system, and issuing the nation's banknotes.
Redraw: A redraw facility allows you to access extra repayments you have made on your home loan and helps reduce the interest payable. Redraw facilities vary between lenders.
Refinancing: Refinancing is the process of taking out a new mortgage to repay an existing mortgage and is often utilised to gain a better deal on your home loan.
Settlement Date: The settlement date is the date when you legally possess your new home, and is often between 1-4 months after the contract of sale is signed, often known as the settlement period.
Split Loan: A split home loan is comprised of both a fixed rate portion and a variable rate portion.
Stamp Duty: Stamp duty, or transfer duty, is a tax on dutiable transactions such as the transfer of a dutiable property. The purchaser usually liable to pay the duty.
Strata Fees: Strata fees, otherwise known as strata levies or body corporate fees, are the fees associated with the upkeep (including running costs, maintenance and insurance) of the building of a property. This is commonly charged to home owners of units, apartments or town houses.
Term: A term is the length of a loan or a specific portion within the loan.
Unencumbered: Unencumbered means to be free of debt or other financial liability.
Valuation: A valuation is the process of determining the present value of an asset. In the case of property, this is often requested by a lender to determine the current market value of a home.
Variable rate loan: A variable rate loan, as the name implies, is a loan with a rate that moves up and down with fluctuations in the economy and the Reserve Bank of Australia’s cash rate. Variable rate home loans tend to be more flexible in comparison to fixed rate loans, with more features (e.g. redraw facility, ability to make extra payments).